Why This Analyst Sees AT&T Undervalued by 20%

AT&T Inc. (NYSE: T) has raised concerns among analysts recently as the company moves toward unlimited data plans and its pending launch of DirecTV. However one analyst is taking a very bullish perspective on the stock, and matching the highest target in the Thomson Reuters universe in its most recent call.

Jefferies reiterated a $48 price target, versus a $39.89 prior close, noting that those concerns over unlimited data and DirecTV having an impact on AT&T’s ability to provide a reliable service are not as warranted as some might fear.

The firm believes AT&T is well-positioned to meet future demands, with a robust spectrum portfolio, well-paced small cell deployments and technology developments that will further reduce network strain.

In its report, Jefferies highlighted three catalysts that are likely to add to traffic:

We see three catalysts that could drive more robust traffic demand in the near-term, including (1) OTT expansions, including the planned introduction of DirecTV Now and Mobile in 4Q; (2) the introduction of “Data Free TV”, which allows DirecTV/U-Verse subscribers to stream live or recorded content without counting towards their AT&T wireless data allowance; and (3) rising penetration of unlimited data plans (requires video subscription). Though unlikely to bend the content demand curve meaningfully, we anticipate the services to further impact the network. In our view, AT&T’s traffic-inducing initiatives highlight the company’s confidence in its network.

Ultimately, Jefferies believes that the company has ample tools to address ongoing traffic requirements. From a spectrum perspective, AT&T has more than 40 MHz available to be deployed (AWS-3, WCS, 700 MHz), which could add over 50% more capacity to the LTE network in the coming years.

The reforming of 2G/3G spectrum (currently about 60% of spectrum deployed) provides an additional source, and Jefferies expects AT&T to acquire spectrum in the broadcaster auction currently underway. Though less aggressive than some of its peers, AT&T can also leverage small cell deployments for incremental capacity, while multiple-input multiple-output and carrier aggregation provide additional tools yet to be fully deployed.

Shares of AT&T were trading up 0.8% at $40.19 on Thursday, with a consensus analyst price target of $42.83 and a 52-week trading range of $31.85 to $43.89.